The rise of flat fees in the legal tech revolution
A new report from LexisNexis takes a look at how alternative billing structures have proliferated in the legal profession over recent years.
The rise of flat fees in the legal tech revolution
A new report from LexisNexis takes a look at how alternative billing structures have proliferated in the legal profession over recent years.
Calling time on the billable hour explores the gradual shift away from the billable hour to alternative fee arrangements (AFAs) such as flat rates. In this article we will highlight the key points of the report and consider how the move towards AFAs correlates with the increased uptake of legal technology.
Is the billable hour on the way out?
LexisNexis spoke to a range of lawyers, firms, and clients across the UK, in order to create the report. Some of the most notable statistics and findings include:
- 43% of UK law firms were offering AFAs to clients in 2021, an increase of 28% from 2020.
- GCs and in house legal teams use AFAs more than hourly rates.
- Flat fees are the most popular type of AFA.
- The main reason law firms introduce AFAs is client demand (85% of law firms surveyed).
- Certain types of legal work (such as routine transactions) are more suited to AFAs than others (such as complex case work).
- The main barrier to AFAs (cited by 63% of firms surveyed) is the ability of law firms to determine profitable pricing.
- Investment in legal technology which helps to maximise efficiency can increase the profits of law firms which implement AFAs.
Overall, the report found a marked shift towards firms offering AFAs since the pandemic, but the status quo remains the billable hour. Currently the main beneficiaries of AFAs are clients, due to certainty of cost, and firms can end up losing money if they fail to correctly set their pricing. But tech-savvy lawyers can use legal technology to substantially increase their efficiency and even automate many tasks, leading to potentially far greater profits in respect of fixed fee work.
Efficiency vs Profits
At present, the main driving force behind AFA adoption is client demand. The more important a client is to a firm, the more likely they will offer them fixed fees upon request - and this is perhaps evident in a finding from the report that more GCs work with firms under an AFA as opposed to an hourly billing basis (46% versus 40% respectively).
Stephen Denyer, director of strategic relationships at The Law Society of England and Wales, says:
“Being on a panel for a major client can be worth many millions of pounds, so if you find that a number of your major clients are opting for competitors who are largely not doing billable hours, obviously you’re going to feel you need to respond to that.“
However, SMEs and private clients have less choice when it comes to fees, so the majority still need to accept billable hours.
The main barrier for the wide scale introduction of alternative fees arguably comes down to concerns about reduced profits. Lawyers who charge on the basis of time spent will obviously earn more for a task the longer it takes them to complete.
Alan Guy, managing director of underwriting and value optimisation at top 200 US law firm Kobre & Kim, explains that a major problem with the billable hour model is that lawyers “who work more efficiently are unduly penalised, because they bill less than someone who maybe took twice as long to do the same piece of work.”
So, theoretically, from a strictly profit-based motive point of view, a time-based billing system encourages lawyers to actually decrease their efficiency so they can maximise their billable hours and more easily reach any monthly targets.
Law firms which shift from time-based billing to fixed fees could end up reducing their profits if they do not set their prices properly, for example by underestimating the time it will take to complete a task. On the other hand, if they set their prices too high, they could lose out to lower priced competitors.
“Being on a panel for a major client can be worth many millions of pounds, so if you find that a number of your major clients are opting for competitors who are largely not doing billable hours, obviously you’re going to feel you need to respond to that.”
Could legal technology be the tipping point for AFAs?
The answer to the “efficiency vs profits” paradox could lie in the adoption of relevant legal tech tools in conjunction with AFAs.
Software that automates or reduces time spent on certain tasks will benefit firms operating on a fixed fee basis far more than rivals which use billable hours. For example, a job which might normally take five hours and cost a client £1,000 (on the basis of £200/hour) might take just one hour using legal tech. In this case, the lawyer could complete five jobs in the same amount of time, netting the firm £5,000, essentially increasing profits by a multiple of five (minus the cost of the software).
As firms increasingly harness new technology and AI tools, they will inevitably start moving towards fixed fees as a way of maximising profits. Whereas currently AFAs are being offered mainly due to client demand, and only 18% of law firms use them to reduce their own costs, the adoption of fixed fees will likely end up being driven by law firms themselves in a race for efficiency and consequent increased profits. In this way, legal technology could provide the tipping point away from billable hours towards AFAs.
About the author
Dylan Brown heads up thought leadership at LexisNexis UK, where he creates a range of investigative reports and insights for legal leaders. Prior to writing about law, he covered topics including business, technology, retail, talent management and advertising.